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Triumph over Tax:

The Latest on Tax Challenges Facing Companies Operating in the US

Presented by: Philip Stein

.com

US Budget

Year Percentage of Budget on Medicare, Medicaid, Social Security, Debt Interest

2010 47%

2019 56%2030 70%

MESSAGE: GOVERNMENT MUST RAISE REVENUE!!!!!

State Income & Franchise Taxes

States are strapped for cash

Increasing efficiency &

audits

Matching records with IRS

and other departments

within the state

Definition – Connection to State

Can be established via:• Physical Presence: Office, Home Office, Independent

Contractors, Warehouse, Property such as servers• Economic Presence: Exploiting the state’s market• Factor Based Presence: Obtaining a certain level of

activity within the state

State Taxes - Nexus

State Taxes – Nexus

PL 86-272 Exemption

• Enacted by Congress to promote interstate commerce• Nexus is NOT established if the sole activity in the state

is solicitation of sales for tangible personal property• Exemption applies only to income tax. Therefore many

states have imposed a franchise tax i.e. Texas, Michigan, Ohio

State Taxes - Apportionment

Activity is allocated between states based on property, payroll and sales

Many states are shifting to market based apportionment i.e. double weighting the sales factor or using only the sales factor

State Taxes – Combined Reporting

Aggressive states are forcing companies to consolidate affiliated entities and file combined reports

California – Corporations must file a water’s edge election to opt out

MA – Corporation must file a combined report if its foreign affiliate earns more than 20% of its income from intercompany services i.e. cost plus agreement between US parent and Israeli subsidiary

State Taxes – New Jobs Credits

Many states offer incentives to create jobs in enterprise zones

CA recently enacted a new credit equal to $3,000 for each net increase in qualified full-time employees from the previous taxable year

State Taxes - Conclusion

TRIUMPH OVER TAX

• Determine whether eligible for exemption• Concentrate nexus activities in one state• Minimize apportionment factors in each state• Capitalize on incentives and credits available

Sales Tax

Under audit, if sales tax has not been collected, the seller is required to pay the current tax due, plus penalties and interest

Imposed on the buyer, but is the obligation of the seller to collect

MontanaOregon

Delaware

New Hampshire

Alaska

Sales Tax

Applicable only if the following three requirements are met:

1. END USER

2. NEXUS

3. TAXABLE PRODUCT OR SERVICE

Sales Tax – End User

Unlike the Israeli VAT system, the tax is only

paid by the final user of the product

No credits are provided for tax paid by corporations

Reseller Certificates – Mandatory in order to

exempt distributors from sales tax

Sales Tax – Nexus

Definition- Connection to State

Examples include:

1.Sales people2.Offices3.Servers4.Sales at trade shows

Sales Tax - Nexus

Sales tax collection is limited to the states in which your company has nexus

The customer’s location is determined by the shipping address (zip code)

The sale of software licenses are sometimes determined by location of the users

Sales Tax – Taxable Product

Generally, imposed only on tangible products

Many states consider

software to be tangible

Taxability of products vary from state to

state

Sales Tax – Taxable Product

Within one contract, some products may be taxable and some exempt i.e. software may be taxable but the annual maintenance can be exempt

Invoices should clearly state the various components of the sale

Use Tax

Definition - If sales tax has not been collected at the point of sale, it is now the obligation of the user to pay the tax directly to the authorities

Consequently, being subject to sales tax collection does not increase the price of your product as the customer is required to pay the tax regardless

Conversely, if you purchase products and have not paid sales tax, the obligation to pay use tax transfers to you

Sales Tax - Conclusion

TRIUMPH OVER TAX

• Determine whether sales tax collection is necessary• Ensure all documentation i.e. reseller certificates are

on file• File and pay electronically for smooth and simple

filing

Transfer Pricing - Definition

Loans require annual interest according to IRS rates and withholding of 17.5% at the time of the interest payment. Interest expense may be limited for tax purposes

Equity investment may result in dividend tax of 12.5%, although funds my be repatriated to parent company as return of capital

Fundamental Question #1 How will the subsidiary initially be funded?

Transfer Pricing - Definition

Fundamental Question #2 What is the revenue model of the US subsidiary?

Common arrangements include:

1. Cost Plus Agreement2. Commissions3. Comparable Profits Method

Transfer Pricing – Why Does it Matter?

Increasing focus on international compliance

Reported on Forms 5471 and 5472 which carry penalties of 10K for late or non filing

In case of audit, must provide study within 30 days

Penalties for tax adjustments range between 20% – 40%

Transfer Pricing – Optimization

• Corporate tax rates in Israel are declining• Combined US federal and state tax rates can easily reach 45%• Due to the US budget constraints, Obama is considering

increased focus on corporations’ taxes and loopholes• Which economy do you prefer to stimulate anyway?

Transfer Pricing - Conclusion

TRIUMPH OVER TAX

• Plan in advance so you have the ability to build your strategy• Minimize your federal and state taxes by choosing the optimal method• Ensure you have a study in place to support your tax positions

Philip Stein & Associates

www.pstein.com | [email protected] | 02- 644-4000 |02- 643-7002

Thank you